Oil prices may be edging downwards these days, but Middle East governments continue to rely on high crude prices when it comes to spending and revenue plans.

In budgets set out by the region’s oil producers for 2013, the recent trend of using higher estimates for oil revenues has been maintained, although they are still below the prevailing market rate. Many of them are clustering around $85-95 a barrel. Bahrain, for example, has increased its oil price assumption from $80 last year to $90 this year; Iran has raised its figure from $85 to $95 and Oman has gone from $75 in 2012 to $85 a barrel this year.

More significant, however, is the price at which these countries need to sell their oil to balance their budgets, known as the fiscal breakeven price. This too has been rising steadily over the past few years as governments across the region have tried to shore up domestic support, or at least quieten opposition, by spending freely. Allied to that has been the longer-term pressure to invest to diversify their economies away from oil and gas.

Balancing budgets

The consequences of these policies are that many countries now find their fiscal breakeven level is well above the prevailing market price for oil and, more importantly, the expected average price this year.

Brent crude has been selling for a little over $110 a barrel for the past two years, but many observers expect the price to fall this year, due to higher output from the US and Iraq and muted demand from a still-struggling Europe. The US’ Energy Information Administration, for example, expects Brent prices to fall to an average of $108 a barrel this year and $101 a barrel in 2014. It was above that level for the first quarter of this year, at $112.6 a barrel, but the price has been on a downward trajectory since mid-February.

Oil producers group Opec’s basket price has been following a similar path. It comprises crudes from its 12 member countries, including eight from the Middle East and North Africa. For most of the past two years, the average price of the Opec basket has been in a range of $100 to $120 a barrel. The price for the first quarter of this year has matched that, averaging $111.28 a barrel, but it too has been falling since mid-February.

Oil prices are notoriously unpredictable, but if the estimates for this year are reasonably accurate, some Middle East producers could find themselves having to dip into their savings or turn to richer allies for help to cover their deficits. The countries most exposed to any fall in prices are, from east to west, Iran, Bahrain and Algeria.

Iran’s need for higher oil prices is a direct consequence of its lower production rate due to sanctions. The trade restrictions make it difficult to import parts and expertise to maintain existing oil fields and also restrict Tehran’s ability to sell its crude overseas. The Washington-based Institute of International Finance (IIF) says Iran’s daily oil production fell from an average of 3.5 million barrels in 2011 to 2.6 million barrels last year.

That is having a direct and severe impact on government revenues. According to the draft budget submitted to parliament in February, as reported by the local Mehr news agency, Tehran is expecting a 40 per cent drop in oil revenues to IR660 trillion ($53.7bn) in the fiscal year that began on 21 March. That is based on an average price of $95 a barrel, but international analysts surveyed by MEED estimate the government needs to sell its oil for about $150 a barrel to balance its budget.

Bahrain deficit

In contrast, Bahrain’s problems stem from domestic issues rather than international ones. Manama faces entrenched opposition despite a bloody crackdown on pro-democracy advocates that began more than two years ago. That has contributed to slower economic growth than any other GCC country and Bahrain, which has more limited oil resources than its Gulf peers, has been forced to turn to its richer neighbours for assistance to balance its budget.

The situation is unlikely to change for the foreseeable future. Its budget for 2013 envisages revenues of BD2.79bn ($7.4bn) but expenses of BD3.4bn, leaving a deficit of BD662m this year. The projections for 2014 are slightly worse, with an anticipated deficit that year of BD753m.

The budget is based on an average oil price of $90 a barrel. If the price of oil does stay above $100 over the course of this year, it will help to keep the deficit in check, but it is unlikely Manama will enjoy the $120 a barrel it needs to balance its budget.

For many years Algeria has set a nominal price of $37 a barrel for oil, after which any revenues are meant to be saved. In reality, the price at which savings start to be made is closer to $89 a barrel, according to the Washington-headquartered IMF. Since 2011, Algeria has also been spending heavily on wages for civil servants and subsidies among other things, which has increased its fiscal vulnerability.

As a result, the fiscal breakeven oil price has been steadily rising, from $84 a barrel in 2010 to $107 in 2011 and $119 in 2012.

The figure is expected to fall slightly to $114 a barrel this year, due to lower capital spending, but the government is likely to turn once again to its Oil Stabilisation Fund to cover a shortfall.

Global problem

The Middle East is not alone in needing higher prices. It is a similar tale in several other countries around the world. According to Garbis Iradian, deputy director of the IIF, Nigeria will need $107.6 a barrel this year to break even, Russia will require $117.3, Ecuador $118.9 and Venezuela needs a forbidding $134.7 a barrel.

For other countries in the Middle East, the prospects are slightly brighter. Saudi Arabia does not say what oil price it is using as the basis for its budget calculations, but the consensus among analysts is about $66 a barrel. Even though Riyadh has a habit of spending more than it says it will, it should still book a healthy surplus this year. The estimates of its breakeven price for 2013 range from $67 to $86 a barrel, with an average of just under $79 a barrel.

As the wide range of those Saudi estimates shows, calculating a breakeven price is not a simple matter. An economist at one major Gulf Bank describes the process as “a fairly dark art”. Certainly, there are many variables, including the amount of oil produced, the cost of oil production, the proportion sold at the market price and the level of government spending, as well as non-oil government revenue.

Almost matching Riyadh’s price is Qatar, which has set a price of $65 a barrel for its budget. Doha, like Kuwait, can afford to see prices fall on international markets without too much concern. Between them they have the lowest fiscal breakeven prices in the region, at $60 a barrel for Kuwait and $66 in the case of Qatar.

Other GCC governments are being forced to run a tighter ship. Oman, for example, is basing its budget on $85 a barrel and a daily production rate of 930,000 barrels, but it is thought to need more than $92 a barrel to breakeven and has, like Bahrain, turned to richer GCC colleagues for extra finance in recent years.

The UAE can get away with a slightly lower level and balance its spending at around $87 a barrel, but it has in any case far larger financial reserves to draw on than Muscat. Nonetheless, Saudi bank Samba Financial Group, which puts the figure higher than the consensus, says of the UAE “the sharp increase in the estimated breakeven oil price to around $90 a barrel for 2013 is a concern”.

Returning health

For two other countries, however, the situation is improving. Libya has based its budget around an oil price of $90 a barrel, which would leave it with a deficit of LD4.6bn ($3.6bn) for the year, equivalent to 4 per cent of gross domestic product. However, with oil production increasing and the economy still recovering, Tripoli can afford to feel relatively comfortable. Its breakeven oil price has fallen sharply in recent years, from as much as $184 a barrel in 2011 to well under $100 a barrel today.

Baghdad too is seeing its economy return to health on the back of higher oil production. The jump in Iraqi output means it also needs to earn less per barrel to break even. It should be able to balance its budget as long as oil prices stay above $96 a barrel this year.